CORPORATE GOVERNANCE IN USA;
CORPORATE GOVERNANCE PROJECT
Name: - Shariq Ahmad Saroori.
Course: - BA, LLB (H).
Sec: - B.
Semester: - 9
Enrollment No: - A3211110132.
Subject: - Corporate Governance in USA; Corporate Governance Project.
Submitted to: - Mr. Ajay Kant Chaturvedi Sir.
DECLARATION BY STUDENT
I hereby declare that the project entitled “Corporate Governance in USA” submitted for BA, LLB (H)
external evolution of Amity Law School, Amity University, Noida is my original work.
Signature of the student
Shariq Ahmad Saroori
I am highly indebted to (Mr. Ajay Kant Chaturvedi Sir) for guidance and constant supervision as well as
for providing necessary information regarding the project & also for their support in completing the
I would like to express my gratitude towards my parents & my sister for their kind co-operation and
encouragement which help me in completion of this project.
I would like to express my special gratitude and thanks to Amity Law School, Noida campus for giving me
My thanks and appreciations also go to my colleague in developing the project and people who have
willingly helped me out with their abilities.
I am glad to present this project, especially designed to serve the needs of the General people. The
project has been written keeping in mind the general weakness in understanding the fundamental
concepts of the topics. The project is self-explanatory and adopts the “Teach Yourself” style. The
language of project is quite easy and understandable based on scientific approach.
Any further improvement in the contents of the project by making corrections, omission and inclusion is
keen to be achieved based on suggestions from the readers for which the author shall be obliged.
I look forward to receiving valuable suggestions from professors of various educational institutions,
other faculty members and students for improvement of the quality of the project.
Shariq Ahmad Saroori
Introduction: Understanding Corporate Governance in the USA
The U.S. is often seen as being the paradigmatic case of the shareholder-oriented or market-
based approach to corporate governance. Ownership of corporations is dispersed, but involves
high engagement from institutional investors, such as pension funds. Corporate boards are small,
have a high proportion of outside or independent members, and utilize committees to improve
board processes. Executive pay links pay to top managers‟ salaries to shareholder returns. The
internal and external aspects of corporate governance are linked through the monitoring of
gatekeepers, such as audit firms, that certify the flow of information from managers to capital
markets. And the market for corporate control exerts a final discipline on poorly performing
firms, who face a heightened risk of takeover. These different elements are also thought have
strong institutional complementarities, operating as a positive and mutually reinforcing system of
effective corporate governance. These stylized characteristics of the U.S. model are widely cited
as best practices or even a global standard for good corporate governance.
Scandals surrounding Enron and World com focused substantial criticism on the U.S. corporate
governance. Some critics and scholars used these events to mount a strong challenge to the
prevailing wisdom about market-based systems of corporate governance (Blair, 2003, Bratton,
2002). Others stress the overall good performance of the U.S. economy, and see the rise of
equity-based pay for managers and the stock market boom as triggering short-term and
sometimes illegal behavior as “side effects” of a basically sound system (Holmstrom & Kaplan,
2003). The political reaction, development of Sarbanes Oxley (SOX) legislation, and subsequent
changes in SEC listing requirements have also altered the way U.S. corporate governance
practices operate. The consequences of SOX have remained hotly debated. Yet the onset of the
subprime financial crisis and resulting global economic downturn has raised renewed questions
about the fundamental effectiveness of U.S. corporate governance institutions.
The era after SOX also greatly increased awareness of the differences between the U.S. and
British approaches to corporate governance. While both are considered to be broadly similar
shareholder-oriented models, the U.S. regulatory regime is based much more on hard law and a
regulatory state, unlike the British approach that relies more on soft law and self-regulatory
mechanisms, such as Codes. The “one size fits all” approach of U.S. law sparked debate over the
benefits of mandatory rules relative to more flexible sets of principles based on enabling set of
rules (Anand, 2006). New U.S. regulation gives greater power and institutional scope to the state
agencies such as the SEC to regulate important „gatekeepers‟ and professional intermediaries
who are central to market-based mechanisms of monitoring (Baker, Bealing Jr, Nelson & Staley,
Understanding Corporate Governance in the United States
Finally, takeover rules are also very different, since the U.S. allows but regulates a range of anti-
takeover defenses, which are not allowed under UK rules.
Recent developments remind us that U.S. corporate governance is not a static system in
equilibrium, but has evolved continuously over the past decades. Prior to the 1980s, the U.S. was
characterized by strong managers and weak owners. Top managers tended to view themselves as
loyal to the corporation, rather than as agents of shareholders. The 1980s saw a huge wave of
hostile takeovers that threatened the hegemony of U.S. managers. Likewise, institutional
investors and particularly public-sector pension funds such as CALPERs became much more
active players in corporate governance, using their growing blocks to exercise greater voice in
corporate management (Useem, 1996). By the 1990s, managers had fought back by lobbying
state governments to en- act anti-takeover legislation, which made hostile takeovers much more
costly (Useem, 1993). But managers also accepted the notion of “shareholder value” as a new
underlying ideology for corporate America. In particular, the rise of equity-based pay such as
stock options gave managers a greater stake in promoting restructuring and orientating their
strategies toward the stock market. This shift went hand-in-hand with the catalysed role of
independent, outside directors in the boardroom (Gilson, 2006). This system continues to evolve
This Report to the Hans-Boeckler-Foundation aims to outline the long-term changes in the U.S.
system of corporate governance that culminated in SOX legislation and continue into the current
period of the financial crisis. The report will also highlight some implications for corporate
governance debates in Germany, either by the direct application of U.S. rules to German
companies or indirectly by setting symbolic bench- marks for corporate governance reform.
The main findings highlighted in the report are as follows:
The various elements of the U.S. corporate governance system have emerged in a piecemeal
historical fashion, often showing substantial misalignment among its various elements leading to
waves of speculative activity (e.g. junk bonds, the dot. com bubble, and collateralized debt
obligations) and subsequent collapse; the crisis of Enron substantially altered the understanding
of how the U.S. corporate governance system operates in the academic literature; the regulatory
response of SOX has sharpened the differences between U.S. and British approaches; SOX
legislation has made some genuine, if costly improvements regarding the role of gatekeepers, but
has not fundamentally altered the weak linkages among limited shareholder engagement,
excessive managerial incentives for risk taking, and conflicted role of independent directors
within U.S. boards; Overall, the market for corporate control may play a lesser role within the
U.S. than is often hypothesized based on the experience of the 1980s.
THE US MODEL
The corporate governance system in USA is based on shareholder wealth maximization
principles. The governing / influencing statutes / bodies include the Sarbanes-Oxley Act of 2002
(SOX), Securities & Exchange Commission (SEC) and guidelines of the stock exchanges like
NASDAQ, NYSE etc. In addition, court judgments in various States are also relevant because
US corporations are registered in particular States.
USA being an intensely capitalistic society, other stakeholders like creditors are not materially
considered and do not have much say. This could be because all the other stakeholders are
themselves governed by their own shareholders or owners. It is expected that shareholders of the
stakeholders will suitably take care of their interests.
In the US model, there is separation of ownership and management to the extent that managers
have a free hand in running the affairs of the organization. The Non Executive Directors monitor
the performance of these managers (who may themselves be Executive Directors) and take
appropriate action to encourage or discourage the strategies being attempted by them. The board
is a single tier body with Executive & the Non-Executive Directors coming together to chart the
course of the organization. The primary duty of the independent Directors is the oversight of all
activities of the Management board. In most cases, one of the Executive Directors, who is the
Chairman, is also the Chief Executive Officer of the organization. Managers are considered as
agents of the owners and hence the Non-Executive Directors / Board may terminate these
“agency contracts” in case of poor performance. On the other hand, these managers get rewarded
for good performance, through bonuses and “free” stake in the organization through stock
options etc. Of course, this leads to short-term orientation and a “micro” mindset of the managers
in some cases. Mechanisms are being created to factor the impact of these stock options on the
profit & loss statements of companies.
The ownership patterns of US organizations are such that they are widely held and capital is
provided by people who are not involved in day to day management of the organization. The
large institutional investors (mutual funds, pension funds etc.) are having maximum stake in
these organizations and the capital markets are more liquid as equity is the preferred mode of
As an example, Citigroup Inc. (NYSE:C) has a single tier board structure with several
Committees for managing the governance affairs and for oversight of management. As per the
corporate governance guidelines of Citigroup, the standing committees of the Board are the
Executive Committee, the Audit Committee, the Personnel and Compensation Committee, the
Nomination, Governance and Public Affairs Committee and the Risk Management and Finance
Committee. The presence of these Committees highlights the critical areas requiring supervision
by the board. The philosophy of Citigroup Inc. (NYSE:C) emphasizes its focus on shareholder‟s
interests. As per the guidelines of the company, “the Board of Directors‟ primary responsibility
is to provide effective governance over the Company‟s affairs for the benefit of its stockholders,
and to consider the interests of its diverse constituencies around the world, including its
customers, employees, suppliers and local communities”. The board keeps a close tab on the
functioning of the management and the recent exit of CEO of the company (Vikram Pandit), was
reported to be a case of the board being dissatisfied with management‟s strategic management
approach. Other companies like Bank of America Corp (NYSE:BAC) have similar board
structures and committees.
In the USA, the rules emphasize compliance & disclosures with penalties for any deviation from
the rules. The system is extremely strict with very little tolerance for avoidance. In fact, the SOX
was a reaction to various frauds in firms like Enron, Adelphia, WorldCom etc. which originated
due to laxity in the accounting & auditing systems. SOX emphasizes on financial disclosure,
independence of audit, criminal liability for incorrect financial statements etc. In USA it is
mandatory for companies which want to be listed to have an audit committee in the board which
interacts with the external auditors, ensures proper financial reporting / disclosures, risk
management etc. This Committee comprises of Non-Executive Directors and has at least one
financial expert so that the system of internal financial control is continuously practiced and
improved. This committee furthers the principles of separation of ownership and management.
The corporate Governance model in UK is pretty much similar to the US system and hence
differs from the models prevalent in Continental Europe.
Conclusion and Implications for Understanding Corporate
Corporate governance practices in the United States are not regulated by any one particular
statute but instead are affected by the governing instruments, the corporate law and the court
decisions of each issuer‟s state of incorporation, and, in the case of many publicly-owned issuers,
by the U.S. federal securities laws and requirements of the national securities markets. Matters
governed by state law include the voting rights accorded to shareholders, the functions of the
board, and the ability of board members and executives to enter into transactions with the
company. State corporation laws vary among the 50 states. However, because many corporations
choose to incorporate in Delaware, Delaware law is a useful reference point for state corporate
governance practices and is referred to throughout this response.
U.S. federal securities laws also affect corporate governance practices, primarily in the areas of
disclosure and financial reporting, proxy voting, and the submission of shareholder proposals for
consideration at shareholders‟ meetings. In addition, the national securities markets impact
corporate governance practices through their requirements applicable to issuers of securities
traded on their markets. Subject to all of these different laws and regulations as applicable,
corporations may establish their own governance practices in their corporate charters and by
International Corporate Governance: A Comparative Approach Hardcover by Thomas